AXP Option Traders Charged Up for Positive Earnings

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AXP Option Traders Charged Up for Positive Earnings

Investors have maintained American Express Company (AXP) share prices range bound ahead of the company’s fiscal second quarter results release. With an increasing quantity of call options in open interest, it indicates that options traders are well-positioned to profit from a bullish rise. If AXP reports a favorable earnings surprise, the unusual option activity might result in a significant upward trend in price movement.

AXP has an increasing amount of call options in open interest, with extremely high option premiums. Trading volumes imply that traders have been selling put options and purchasing calls in expectation of a favorable earnings release. If AXP’s earnings release falls short of market expectations, these bets might quickly unwind, putting negative pressure on AXP’s share price.

It is tough to forecast which way a stock will move following results. A comparison of the price movement of stock prices and option trading activity, on the other hand, reveals that if the firm presents a favorable report, AXP shares might gain dramatically, moving closer to their 20-day moving average in the first few days following the release. This is possible because options are priced for a little movement, but better-than-expected excellent news might take traders off guard and trigger a big spike in price.

Key Takeaways

  • Traders and investors have kept the price of shares bound in a middle range headed into the announcement.
  • The price recently has been trading above its 20-day moving average.
  • Put and call pricing is predicting a stronger upwards move.
  • The volatility-based support and resistance levels enable a greater downward slide.
  • This setup provides traders with the possibility to benefit from an unexpected outcome.

Option trading encapsulates the activity of speculators seeking to benefit from accurately projecting unexpected swings in an underlying stock or index, as well as investors seeking to safeguard their holdings. That is, option trading is a wager on market probabilities. Chart watchers may acquire significant information by analyzing the intricacies of both stock and option price behavior, albeit it helps to understand the context in which this price behavior occurred. The chart below displays the price movement of American Express stock on Wednesday. This resulted in the setting for the earnings report.

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Current Trends

The stock’s trend over the last month has seen the share price stay in the center of the range, at or above the 20-day moving average. It’s worth noting that share prices rose above the 20-day moving average in July, only to fall back below it in the days leading up to the announcement. As seen on the chart, the price has constantly remained at or above the moving average.

The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the price has maintained close to the top and middle ranges of the range. This is a bullish price movement for AXP shares.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

In this scenario, where AXP’s price trend has been staying in the top portion of the middle range, chart watchers may see that traders and investors are optimistic about results. The share price climbed in the week before results, only to dip below the 20-day moving average the following week before regaining the area above it. As a result, chartists must decide if the change reflects investors’ expectations for a poor earnings release or not.

Option trading data may assist chart watchers build an impression about investor expectations by providing extra information. Recently, option traders have begun to prefer calls over puts by a wide margin, as open interest in options has shifted toward calls rather than puts. This often indicates that investors anticipate positive news from the corporate report, and traders tend to anticipate that AXP will rise following results.

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Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

Trading Activity

Option traders realize that AXP shares are somewhat above average and have priced their options as a wager that the company will close inside one of the two boxes illustrated in the chart between today and July 23, the Friday after the publication of the earnings report. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 35% probability that AXP shares will finish inside this range at the end of the week. The red box reflects put option pricing, with a 34% likelihood that prices will fall after the announcement.

It is important to note that the open interest featured nearly 85,000 call options active compared to roughly 100,000 put options, demonstrating slim bias that option buyers had, as there is a small majority of put options over calls. This unusual amount normally implies that option traders expect a move downwards. However, because the call box and the put box are relatively equal in size, it tells us that the high percentage of put options traded has not skewed expectations that much lower. This circumstance implies a far more complacent outlook.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

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The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with equal space to run either direction. This suggests that option buyers don’t have a strong conviction about how the company will report, even though puts are being purchased over calls. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, AXP shares rose 1.9% the day of earnings and continued to rise the following week. Investors might be expecting the same kind of move in price after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

AXP shares typically make substantial moves after earnings, so the result might move index prices directly. However, no matter what the report says, it will likely have a significant impact on stocks in the financial sector. A positive report could lift other stocks in the sector such as Mastercard Incorporated (MA), Visa Inc. (V), or PayPal Holdings, Inc. (PYPL) (PYPL).It would also affect exchange-traded funds (ETFs) such as State Street’s Financial Sector Index ETF (XLF) and potentially State Street’s S&P 500 Index ETF Trust (SPY) (SPY).

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